5 Million Dollar Bank Loan

Corky,

Based on your concerns, it sounds like the larger issue is that your Association doesn't have adequate reserves.

When was your last reserve study done?
Is the Association fully funding the Reserves based on the study?

I think it's silly to obtain a loan and pay the interest vs. fully funding the reserves and earning interest.

If the Association chooses not to fund the reserves (that is to pay now for repairs in the future), then the options are limited. They include deferring maintenance/repairs, special assessments or loans. Seems your Association has chosen to utilize loans vs. properly funding the reserves.

For more information on reserves see the following thread in this forum:

Subject: Reserve Studies/Funds 101
http://www.hoatalk.com/Forum/tabid/55/forumid/1/postid/103517/view/topic/Default.aspx

Thank you Tim. I agree. The interest alone will be over a million, and may be a few million dollars. My apologies in advance, I know I'm doing a bit of venting frustrations here.

We have reserves and professionals complete our reserve studies. But, hallway remodeling was not part of the reserve study. And, apparently we were grossly underfunded for plumbing. Professional plumbing reports were completed several years ago. Our board is aware of how to complete reserve studies and collect appropriate reserves. We actually have a civil engineer on the board that advises the rest of the board. But they censure him, put him down and send out negative propaganda about him. The 3 board members that obtained the loan and contracted for the hallway remodel seemed determined at all costs to move this expensive hallway remodel and big money loan forward.

Although the board was aware of our dire need for re-piping, they decided to do aesthetic changes first. To make matters worse we have termites, dry rot and a very old roof. They were advised by home owners and a civil engineer to have termite inspections and dry-rot inspections for all of our wood trim, bannisters, decks, and balconies. They were advised that they could touch up the dark brown paint on the wood trim. They did not complete the inspections. Instead they painted all the wood trim white, which required several coats of paint vs. keeping the same color. They replaced all the street-side grass with wood chips and flowers. The city was giving partial rebates for this. But they did not collect a rebate from the city. We will not make up for cost with water savings because it was a very expensive undertaking. They also remodeled the gym and residents lounge.

I am all for upgrading the aesthetics. But not at a huge financial risk to home owners. Now we are in a position where if we want to sell, we of course will have to disclose this bank loan to potential buyers. I think the bank loan will turn off potential buyers because millions of dollars of debt shows a gross mismanagement of funds by the BOD. Does anyone agree with this or is it my own fear? The campaign propaganda for this project was so biased that many home owners believe we will make up for the cost of the hallway upgrades with increased property values.

I found some interesting related case law:
Nahrstedt v. Lakeside Village, the California Supreme Court ruled that HOA boards must put the collective rights of the community above the individual's rights when it comes to enforcing the CC&Rs. This decision meant that despite any individual expectation of the HOA’s duty, the board will always put the community’s needs first, even if it means letting the grass go weeks without being cut to pay for roof maintenance.

I am very interested to hear opinions about this situation and how the loan could affect our property values.

After 10 years on the board (I stepped down in 2014), I decided “property values” are very subjective and can mean everything and nothing, depending on who you talk to. I do know owning a home, whether it’s a condo or a detached house, doesn’t come cheap, so if you want to sell it for more than what you paid for it, you must take care of it. Hopefully, your neighbors feel the same as you and if everyone keeps a well-kept community, people may be more likely to want to buy a home and live there.

I think the best any condo or HOA board can do is enforce the rules fairly and consistently, and make sure the financials are straight, with doing regular reserve studies, funding them properly, watching the operating budget for signs of waste and eliminate it, shopping around for good contractors, etc. Let the market take care of itself – homeowners are more likely to buy into a community that’s being run in a prudent and transparent manner than one where the assessments remain “low”, but the property has been allowed to go down the toilet.

In this case, a smart buyer would take a long and hard look at your financials and perhaps the board meeting minutes and then ponder: do all the buildings have an issue with plumbing? How come those people over there were yelling about – termites (WTH???) This month’s board meeting minutes had some conversation about a $5 million loan – what’s THAT about? This sort of stuff can result in a possible buyer running for cover and the place may never sell or people will have to settle for whatever they can get – how’s that for “property values?”

Once again, I must ask - where are your neighbors on all this? You may have a sloppy board, but unless and until they rise up and say something, perhaps recalling them (which I think would be appropriate), nothing will change. You have some valid questions – maybe you should discuss your concerns with them and see what they think. If everyone gets angry enough, they can vote these people out, but 3 more will have to rise up and be willing to serve and make some very tough decisions. Yes, that includes you – you want things to change, it may be YOU will be the one who has to get it started and follow it to however it ends.

Payment plans, especially one including a no interest payment plan would be fantastic. We pushed hard for this. Unfortunately, our HOA and Bank said this is not an option for us. We will have a 20 year loan. At the end of it, we will have paid the bank at least a couple million in interest. Maybe you had a different kind of loan that was secured with community property. Ours is secured with our monthly dues. It would make more sense if our loan were only for needed repairs and upgrades. However, much of it is for a personal aesthetic changes by certain board members.

If we move forward and the place "looks great". It still does not resolve our other and more serious issues:
- Disclosing this huge debt to potential buyers will show financial mismanagement and decrease property values. Especially in light of the fact that we will still need to replace our roof and plumbing on the 2nd and 3rd floors. Also, dry rot and termite issues.
- We have many home owners on fixed incomes. The dues were recently raised and will be raised further. This is okay. But now we will be due for further increases because we haven't begun to start paying for the loan. We could have home owners defaulting on payments.
- If we have any emergencies like a lawsuit or otherwise, we may not be able to pay for it. We will not be able to get another bank loan.
- We will be at a greater risk for bankruptcy

We are located by the beach. We have 5 buildings connected by open courtyards. The hallways are partially indoor, partially outdoor, and somewhat open to the elements and rain. With over 500 units, they are heavily trafficked. The new color scheme does not match the rest of the building. And, we will now have light colored carpets instead of dark. This would be great except that they are going to show a great deal of dirt. The new plaster on the walls is going to show every mark as well. We were supposed to get carpet tiles that we could replace. We did not get that. We have cut strips of glued down cheap carpet masked to look like carpet tiles. The edges of all the pieces are already starting to fray. When the halls are hit with the rain and heat, the carpet squares will start to lift and curl on the edges and fray even more. To top it off, we all have to paint our screen doors light blue. Before they were standard black. Soon the new paint will wear and chip on these as well. Then we will have light blue screens with black parts showing through. Our contracted laborers are going to hand trowel our walls to apply smooth plaster. There are aged pipes and most likely termites under these walls. It looks like we will be cutting into our new expensive walls again in a few years to replace the plumbing.

I wish I could say our place will look great. But, our hallways will age even much more quickly than the previous hallways. Only now we will still be paying for them in 10 years when they look old and dated. I'm sure your project was great, John. I wish I could say the same for ours.

I like this idea. Thank you.

It would be great if we could separate this out by owner so we would only be responsible for our portion. Then we could avoid paying the interest. I like that your loan was for only 5 years, rather than 20 as well.

There are always pros and cons. The only issue I foresee is the case where I pay off my loan entirely, then some others default or foreclose/ file bankruptcy because they cannot afford to pay it. Nothing is perfect, but I think this option is certainly better.

I can see why the math seems off. Sorry for the confusion.

The loan is for both re-piping (1st floors only) and the hallway remodel (all floors). The 8,000 is not the cost to each owner for the loan. It is the cost of the hallway remodel per owner (interest included). No plumbing work is included in the 8,000. I pointed out the 8,000 for hallway remodeling because this cost seems way over inflated for what we are getting. And, it is a lot to pay for aesthetics when we have much plumbing, roofing and other necessary work to do.

We did a calculation to divide up the linear feet of hallway per owner. We will each pay 8,000 for only ~20 linear ft of hall remodel. They already completed the remodel on 1 floor of 1 building so we know how much it costs and what the materials look like. Since we have small studio, 1 and 2 bdr apartment style units, and narrow plain hallways, this prices seems much too high. If anyone has thoughts on this, please chime in.

However, your point remains the same and is well taken. With a 5 mil loan your numbers are correct. I think we could save a lot of money funding as much as we can ourselves and doing the work in stages. We could do plumbing and minor hall remodel (because we will tear up walls/ ceiling etc) to our first floors only. We could work on our budgeting get termite reports etc, then start the aesthetic remodel of 2nd & 3rd floors when we are more structurally and financially sound. But, the BOD is going to do one building at a time. Plumbing first floor & aesthetic hallway remodel, all floors. I'm guessing the contracting company sold them on this idea. It ensures they get a lot more business in one shot.

The Association almost has the loan. They said lawyers on both sides are looking at it and it will be signed end of this week. We have asked many times, they will not show us the paperwork for the loan. We will ask to look at it again after it is signed. In CA we have a right to view all signed contracts.

The method for obtaining the loan vote was shady as well. But that's a whole additional topic.

Thank you Janet. It appears this is what is happening.

I've worked a bit in the corporate world. It is normal there to have to stop, re-group, and take a new direction. But, our BOD is driven to do the remodel fast. We understand the plumbing is urgent. But the remodeling is not. We have multiple slab leaks on the 1st floors. That should be prioritized. We should at least be able to see professional termite and other structural reports prior to moving forward with expensive prettification. Although I have to say, it's not so pretty.

Our halls will look like long dizzying airport corridors with a row of numerous canned lights down the middle. Because the halls are very long and basically a plain box you actually get vertigo effect when you stand at one end and look at the other. Instead of upgrading our current wall sconces they are re-wiring and installing canned lights. They think this is more modern. Canned lights can look nice in a modern room with nice furnishing, wall art... But in a very long plain box hallway they have a twilight zone effect. Designers have a name for this that I can't recall. There are ways to design to avoid vertigo effect by combining a few types of lighting. Up lights combined with up/down lights on the walls and some strategically place recessed lights, for example.

Remodeling is schedule to start in 6 days. I don't want to sit back and do nothing. Maybe we should send a more formal letter to the BOD urging them to prioritize and citing the CA Code re: fiduciary duties??